Regulatory gaps, again PDF Print E-mail
Saturday, 03 August 2013 00:00
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NSEL's story of a year-long inquiry going on and on ...

Since the Forwards Markets Committee (FMC) has only now been asked to officially probe the National Spot Exchange Limited (NSEL) payments crisis, it will be a while before there is clarity on the issues dogging the market: does NSEL have the stock of commodities it says it does, did it have valid authorisation to carry out the trades or was the exchange was being used by financiers using complicated trades disguised as commodity transactions—buying spot contracts and simultaneously selling deferred payment contracts at a higher price, with the difference being interest charges. The current crisis took place when the consumer affairs ministry asked NSEL to stop the trades it offered for a duration of more than 11 days on grounds these were the domain of futures markets. NSEL’s explanation is that the law allows it to carry out the trades and, given the government directive had created a mismatch between buyers and sellers—it was asked to stop offering contracts for more than 11 days—it would need time to get clarity on what kind of contracts it could offer. It has also argued that, in case buyers did not make good their commitments to sellers, the exchange had R6,200 crore of commodities that could be liquidated to make good the payments of R5,500 crore—in other words, there is no payments problem, just a delay due to the change in government policy.


Whatever the final outcome of the inquiry, what is worrying is that, once again, yawning regulatory gaps are showing up. Thanks to a peculiarity of the law, NSEL was not regulated by anyone. The FMC regulates futures exchanges, NSEL was a spot one even though some of its trades looked like they belonged in futures exchanges. Indeed, in its defence, NSEL has been arguing there was nothing prohibiting it from offering such contracts. What makes things worse is that the problem was first reported last year in April. When the FMC got NSEL’s replies, it said it was not satisfied with them and sent its comments to the consumer affairs ministry by August. Simultaneously, the finance ministry was also asked to look at whether the exchange mechanism allowed it to be used by financiers. Indeed, the subject of who will regulate spot exchanges has been discussed for nearly two years at the High Level Coordination Committee on Financial Markets (HLCC) that has now morphed into the Financial Stability and Development Council (FSDC). While no resolution has been found to the issue, what has been proposed is that when the Spot Exchange Act is passed by Parliament, such exchanges will be regulated by FMC. Such regulatory gaps, interestingly, are what were found during the vanishing companies case when it was never clear whose job the monitoring of the end-use of funds was. In the most recent case of Saradha, similarly, there was no clarity on whether Sebi’s remit extended to funds collected through just the capital markets or whether it included, for instance, money supposedly collected for real estate transactions. Each time a problem surfaces, it turns out there is a new regulatory gap that is discovered.


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